Tough economic conditions affect many, if not all, of the states and their political subunits. Income constraints and expense pressures make it difficult to balance budgets on an annual basis. Governmental units must also deal with issues concerning unfunded liabilities following the implementation of the Governmental Accounting Standards Board (GASB) Statement 45 concerning Other Post Employee Benefits (OPEB). Under Statement 45, unfunded liabilities must be accounted for in financial statements. This burden of having to account for unfunded liabilities places more pressure on already strained budgeting systems.
Two issues are worth particular mention when discussing unfunded liabilities. One is the amount of the unfunded liability. By way of example, the 2006 Michigan Comprehensive Annual Financial Report (CAFR) for public school employees estimated a FY2005 pension plan deficit of just under 10 billion dollars. This was a deficit increase of $2.45 billion dollars over the prior year. Other estimates showed this gap widening. If other state agencies are also accounted for, the deficit grows to over $12 billion dollars, not including the potential accounting problems raised by Statement 45.
The other issue worth particular mention is the type and availability of the contributions that are made to pay for liabilities. This issue may be demonstrated by looking at the state of the Michigan Public School Employee Retirement System (MPSERS). The Annual Required Contribution (ARC) for the MPSERS for 2006 was over 1.1 billion dollars. The actual contribution was slightly under $1 billion dollars. This under funding of payments compounded the overall negative economic outlook, and becomes more serious still when OPEB and Statement 45 are considered.
The financial ramifications of unfunded liabilities on states and their subunits is significant and long term. The credit rating agency Standard and Poor (S&P) may also be closely watching this issue, especially as it relates to OPEB and Statement 45. Pensions are typically funded at the 80th percentile. However, OPEB is funded at the 25th percentile. Therefore, if the new accounting rules in Statement 45 are ignored, the result could be that a state or subunit would see a lowering of its credit rating. A lowered credit rating could result in higher borrowing costs and unfavorable changes in how interest accumulation is calculated under the ARC.
Factors that governmental units need to consider to address the issues mentioned above include adjustments to benefits, addressing funding issues, and the creation of unique solutions to enhance cash flow. Each of these factors may be addressed on several levels, such as reducing post employment benefits (OPEB), offering new employees/new retirees adjusted benefits, and placing a cap on employer-provided benefits. The governmental units may also utilize early buyout programs to change the cash flow cycle. Finally, other methods may be utilized to create additional solutions to the problem of unfunded liabilities.